What will bigger targets mean for producers, livestock, obligated refiners, and the diesel-using public?

In Washington, the EPA issued its final rule for 2013 establishing 1.28 billion gallons as next year’s biomass-based diesel volume requirement under the Renewable Fuel Standard (RFS), up from 1.0 billion gallons in 2012.

“This 1.28 billion gallon level is in-line with what the EPA had originally proposed for 2013 dating back to last year,” commented Raymond James energy analyst Pavel Molchanov. “However, the delay in formalizing this target had led investors and biodiesel industry participants alike to question the EPA’s commitment to this level. The RVO was originally expected to be completed in July, and with the election fast approaching many had thought the final ruling may not occur until mid-November.”

What does this mean in the context of the overall RFS2 targets for 2013?

The 2007 EISA Act called for 2.75 billion gallons of advanced biofuels in 2013 – that’s up from 2.0 billion gallons in 2012. That can come from any qualifying source (a registered fuel that provides a 50 percent lifecycle reduction in emissions, compared to petroleum-baed fuels), and includes sugarcane ethanol, some advanced forms of corn ethanol, biobutanol, and all forms of biomass-based diesel. Obligated parties can also buy RIN credits in lieu of blending “wet” gallons of fuel.

Overall, it means that the diesel side is expected to pick up 40 percent of the increase in RFS2 mandated volumes for 2013 (280 million out of 750 million gallons). That’s relatively conservative – given that biomass-based diesel accounted for 50 percent of the 2012 pool. According to producers, it’s highly feasible to achieve the production volumes.

Do biomass-based diesel fuel mandates cost the public?

The Yes view. Mandates invariably cause fuel prices to increase – in many cases, massively so – by requiring fuel distributors to utilize fuels with favorable environmental or social attributes, instead of choosing the lowest-cost supplies.

The No View. Mandates can reduce fuel costs by reducing demand for imports – and even small reductions in import volumes through alternative production – in these times of tight refining capacity – can have substantial depressive impact on prices.

The social cost view. Fuels cost more than money. They can have impact on air quality and health (particularly among children); energy imports come with hidden social and financial costs in burdening the nation’s military with the task of defending fuel shipping lanes; energy imports also reduce local employment in energy production and reduce the direct and indirect local economic impact that flows from job creation.

The EPA responds. Yes, there is a financial cost – but it’s a rounding error. “The AEO projects that the U.S. will consume 44.9 bill gal of blended diesel in 2013.75 Averaged over this diesel pool, the quantifiable costs of the 1.28 bill gal mandate translate into a per gallon cost of between $0.006 and $0.008 in 2013.”

Why don’t ranchers and poultry farmers freak out over increases in the biomass-based diesel portion of the Renewable Fuel Standard?

Generally, because they use soybean meal rather than soybean oil to feed livestock – so there’s less competition between livestock and fuel on the biomass-based diesel side. Plus, animal residues have to be used somewhere – and they have made an excellent feedstock for fuel production at the 75 million gallon Dynamic Fuels facility (owned by Syntroleum and Tyson), and will be the key feedstock at the 130 million gallon Diamond Green Diesel facility (jointly owned by Darling and Vaero).

Other changes in RFS2 relating to home heating fuel: Amended Definition of Home Heating Oil

This year, the EPA amended its rules to expand the scope of renewable fuels that can generate Renewable Identification Numbers (“RINs”), to include fuel oil that will be used to generate heat to warm buildings or other facilities where people live, work, recreate, or conduct other activities. This rule will allow producers or importers of fuel oil that meets the amended definition of heating oil to generate RINs, provided that other requirements specified in the regulations are met. Fuel oils used to generate process heat, power, or other functions will not be approved for RIN generation.

Industry reaction

Randy Olson, executive director, Iowa Biodiesel Board

“We applaud this smart growth in biodiesel production, which keeps America‚s domestic energy industry moving forward. When the United States manufactures its own products, it benefits society. Encouraging production of American-made fuel brings economic development and energy security – two of our nation’s top priorities. ”As the nation’s leading biodiesel producer, Iowa stands to gain more jobs and economic growth from this policy. The new biodiesel production will create and support green manufacturing jobs at Iowa’s 13 biodiesel plants instead of sending money overseas for oil. It will also enhance the rural economy by supporting Iowa farmers. This includes livestock farmers, because demand created for soybean oil has the positive effect of lowering meal prices from what they otherwise would be.”

Daniel J. Oh, President & CEO, Renewable Energy Group

“This announcement offers certainty throughout the biodiesel supply chain, will grow green collar jobs and enhances our nation’s energy independence. We applaud and thank President Obama and his administration, including Secretary Vilsack and EPA Administrator Jackson and her team, for their public support and due diligence in working with the biodiesel industry to implement these sustainable growth numbers. They have reaffirmed that RFS2 is working as intended for biodiesel and that it will continue to do so.

“We believe the biodiesel industry, and REG specifically, are positioned to utilize the waste, by-products and recycled fats and oils from American agriculture and food production to meet the 2013 RFS2 number.”

John Plaza, CEO, Imperium Renewables

“This policy will be critical in ensuring strong demand for biodiesel nationally and help companies like Imperium increase production going forward. This showcases the leadership needed to increase America’s ability to source our energy right here at home.

“Imperium Grays Harbor employs 45 full time employees, several of whom are veterans of Iraq and Afghanistan, in the production of American-made biodiesel at competitive prices. This policy will enable us to increase production, continue to support family wage jobs in Washington state and result in several million dollars in additional revenue to the county of Grays Harbor and the state of Washington in the form of port fees, payroll and sales taxes and other economic benefits.

“A strong and stable RFS has been key to the development of the US biodiesel industry and is important as the industry continues to grow and provide increased economic benefits and job creation. The biomass-based requirement alone will reduce the import of petroleum-based diesel next year by nearly 31 million barrels and keep over $4 billion in US dollars from going overseas.”

Shares impact: Renewable Energy Group

Over at Raymond James, Pavel Molchanov writes, “REGI production margins rely heavily on RIN values, which should increase now that the RVO is in place. Approximately one-third of REGI’s per gallon selling price for biodiesel is tied to the value of RINs – which are the enforcement mechanism of the RFS2 program. Obligated parties are required to deliver RINs to show compliance to the RFS2, as such when mandated volumes increase (and outstrip production levels), the RINs become dear and increase in value – this occurred in mid-2011. In recent months, the lack of clarity around the 2013 mandate has resulted in lower RIN values. Changes in the RIN value have a direct impact on REGI’s production margins. We estimate a $0.10 per gallon increase in the realized RIN value would serve to boost 2013 EBITDA by ~25%.